Go to Jeff Salisbury LWGate Home Page.From: "J.D. Baldwin" <baldwin@netcom.com>
Subject: Pay early on a house, or "invest"?
Date: Wed, 9 Dec 1998 11:39:39 -0800 (PST)
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> Your example sounds great. Instead of paying off a debt at 5% net, > invest at 10% net. Good in theory. Your plan though will force > people to overpay for their homes. It doesn't matter that you "overpay" for your home if the benefit of doing so is a net "win" for you because that money was invested elsewhere and made you that much more money. That said, you are right to be skeptical. In general, I think the average person is a lot better off paying extra principal with his house payment every month. If you have extra money after *that* to invest, great. If you don't, then you probably aren't in a situation where you'd benefit from putting money elsewhere. There are several reasons for this: 1. The PMI scam. (I really, really hate PMI.) PMI isn't deductible, and it goes away when you reach 20% equity in your home. Thus, you get a higher effective return on extra principal paid than you mortgage rate alone would lead you to believe. 2. Confidence of ROI. "Invest at 10%" sounds great. I am still waiting for someone to show me the investment where I get a 10% GUARANTEED return. Because of the nature of a loan repayment, paying extra principal *guarantees* that I will get a significant positive ROI on that money over time -- for me it's about 7.5% right now. That counts for a lot. 3. Liquidity. Well, sort of. When it comes time to sell a house, it's usually because one is buying another house. The extra principal built up in one's current house will come in mighty handy then, and might well make a significant difference in the amount of house one can afford next time around. In that hypothetical other "investment," your money may or may not be available to you. - -- From the catapult of J.D. Baldwin |+| "If anyone disagrees with anything I _,_ Finger baldwin@netcom.com |+| say, I am quite prepared not only to _|70|___:::)=}- for PGP public |+| retract it, but also to deny under \ / key information. |+| oath that I ever said it." --T. Lehrer ***~~~~----------------------------------------------------------------------- - -
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